I have been a CPA for over 30 years focusing on taxation. I have extensive experience with partnerships, real estate and high net worth individuals.
My ideology can be summarized at least metaphorically by this quote:
"I have a total irreverence for anything connected with society except that which makes the roads safer, the beer stronger, the food cheaper and the old men and old women warmer in the winter and happier in the summer." - Brendan Behan
Nobody I work for has any responsibility for what goes into this blog and you should make no inference that they approve of it or even have read it.

No Money For April 15 1040 Balance Due? Don't Panic!

If you are facing a large balance due this April 15th and don’t know where the money to pay it is coming from, you may be starting to panic. Go ahead and scream and yell a bit or whatever it takes to get it out of your system, then take a deep breath and read the rest of this post. Unenviable as your situation is, it is not dire. There will not be a team of IRS commandos surrounding your house and auctioning off all your possessions on April 16th. You can start working your way into a situation something like that, if you start making bad decisions, but it will take years and quite a few bad decisions.

Two Different Systems

Here is the most important thing you need to understand. There are two very distinct sections of the IRS that are of concern to folks like yourself. One is concerned with processing and examining your return to determine your correct tax. Once they are done, there is an entirely separate group that concerns itself with actually collecting the tax from you.

Most tax advisers focus on getting your return, including structuring things to legitimately minimize your liability, right. Representing you at an audit and even litigating are an extension of this process. The underlying assumption is that ultimately you will get a bill and pay it. It goes without saying that you will want to take a close look at your return to see if there is a way to reduce that balance due. In principle, though, you would want to put the same effort into a return where you were getting a refund. For purposes of this discussion, let’s assume that there is no brilliant maneuver that can be bring your balance due down to an amount that you can write a check for. What do you do?

I spoke with my friend Mark Stanhope, who practices in the collection area quite a bit. He told me the on-line payment plan usually works out to 72 months. Presumably, you can pay it off earlier to save interest, when your ship finally comes in.

If You Need Help

The main reason I spoke to Mark is because he is my go to guy on collections issues. I even sent him someone whose Tax Court case I wrote about. Mark used to work with me on affordable housing audits, but he moved on and learned the collection ropes from the late Murray Hershman, who was famous in the city of Worcester for his WTAG Tax Minute, which I used to catch while listening for the school closings. Only a small minority of tax practitioners are any good at collections work, so don’t count on your regular tax preparer being able to help you. The field has been polluted by some heavy TV advertising mountebanks, who charged a lot of money for doing next to nothing. So how do you get help?

The services a CTRS provides to individuals and businesses include securing Offers In Compromise, Installment Agreements, Penalty Abatement, Innocent Spouse Relief, Release of Liens or Levies, Non-Filer issues and many others.

The designation is only awarded to CPAs, attorneys and Enrolled Agents. You may also be able to find someone by networking, but be cautious, as most people do not understand the distinction between regular compliance work and collections work.

Be Sure To File Your Return

One of the most common errors that people make is waiting until they have the money to pay before filing their return. That is very bad idea because as bad as interest and late pay penalties are, the late file penalty is brutal. 5% a month maxing out at 25%.

Should You Extend?

You can request a extension of time to file even though you don’t have the money to send in with it. This gets you out of the late file penalty, although it does not help with interest. The other advantage of going on extension is that it will be six months longer before your payment plan commences.

Consider Robin and Terry. Robin is a teacher with an adequately withheld W-2 of $60,000. Terry is a partner in a partnership that had a great year in 2013. Terry has a K-1 showing $300,000. Unfortunately the partnership had a disastrous first quarter in 2014 and the usual April distribution will not be forthcoming. With separate filing, Terry can apply for a payment plan that does not consider Robin’s earnings. It is possible that Terry’s liability will be deemed not currently collectible. Joint filing creates joint and several liability making Robin’s steady paycheck fair game. If things ever get straightened and money starts flowing from the partnership, Robin and Terry can amend to a joint return.

The separate filing strategy does not work so well in a community property state.

What Not To Do

As you have been scouring the internet for help with your problems, you have probably found material that indicates that most regular Americans don’t really have to pay income taxes. The whole thing is an elaborate ruse. Although people keep coming up with new views on this, probably the best worked out one was put forth by Irwin Schiff.

Irwin Schiff has an analysis of several Supreme Court decisions in the decades surrounding the 16th Amendment that lead to the conclusion that the income tax applies to a very limited set of transactions. I have read his book (and others) and the cited decisions, in full, and am not convinced, but, of course, I’m just a CPA and you probably figure I’m invested in the system, since I have made my living off it.

I have also spoken to Irwin Schiff’s sons, Peter and Andrew. They both believe that their father’s interpretation is correct. They, however, do not recommend that you emulate him, because the federal judiciary has uniformly ruled against interpretations like Irwin’s. Irwin is in federal prison and the next birthday he will celebrate in freedom will be his ninetieth.

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.

Comments

Spot on advice. I see a pattern in collection cases that goes like this: first, they don’t file because they don’t have the money; second, they never quite get around to raising the money; third, they get to the next year and say-oh, I cannot file because they will realize I didn’t file last year. This quickly snowballs into a big mess.

The advice in this article should be taken to heart by every taxpayer. I am the National Director of the American Society of Tax Problem Solvers (ASTPS) and I can attest to the fact that the issues many taxpayers face when dealing with the IRS can be eliminated or greatly reduced by following this sage advice.

ASTPS is a non-profit, professional association dedicated to providing education to professionals who wish to represent taxpayers and to eliminating disreputable or unqualified representatives.

It does not matter if Irwin is correct, or if other ‘taxes are illegal’ concepts are correct…the IRS will still hammer you. This is one area of law that, regardless of who is right or wrong does not matter. The IRS will always prevail no matter the truth. No judge in their right mind would rule against the IRS. So, just pay the tax and stay out of jail, it’s a small price to pay to be born in a 1st world country by pure accident.

Love seeing articles on tax collection! Nice work. Just one clarification. In your example with Robin and Terry, the IRS considers still considers Robin’s income as far as what percentage of her income goes towards joint expenses. And if they live in a community property state, she would still be liable (and subject to levy) regardless of if they filed separately.